Novell Challenges SCO Over Unix, Linux

While SCO Group Wednesday told the world about its first net income in company history, Novell came out swinging, challenging SCO's ownership of Unix System V copyrights and patents, as well as potential intellectual property rights claims over Linux.

In a letter to SCO President and CEO Darl McBride, Jack Messman,
chairman, president and CEO of Novell, said that when Novell sold Unix
System V to SCO in 1995, the asset purchase agreement did not transfer
the copyrights and patents.

"[SCO] is not the owner of the Unix copyrights. Not only would a quick check of U.S. Copyright Office records reveal this fact, but a review of the asset transfer agreement between Novell and SCO confirms it. To Novell's knowledge, the 1995 agreement governing SCO's purchase of Unix from Novell does not convey to SCO the associated copyrights," Messman said in the letter. "We believe it unlikely that SCO can demonstrate that it has any ownership interest whatsoever in those copyrights. Apparently, you share this view, since over the last few months you have repeatedly asked Novell to transfer the copyrights to SCO, requests that Novell has rejected."

Novell also called on SCO to prove its claims that Linux has incorporated
code from its UnixWare.

"SCO claims it has specific evidence supporting its allegations against the
Linux community," Messman wrote. "It is time to substantiate that claim,
or recant the sweeping and unsupported allegation you made in your letter.
Absent such action, it will be apparent to all that SCO's true intent is to
sow fear, uncertainty, and doubt about Linux in order to extort payments
from Linux distributors and users."

While SCO's $1 billion lawsuit against IBM currently only charges the
company with misappropriation of trade secrets, SCO has hinted that
copyright infringement or even patent infringement charges might follow.

SCO told Linux users two weeks ago that they may find themselves in the
crosshairs for using the open source operating system, sending letters to
some 15,000 corporations warning that "Linux is an unauthorized
derivative of Unix and that legal liability for the use of Linux may extend
to commercial users."

SCO contends that portions of its Unix intellectual property have made
their way into Linux illegally, and has backed up that claim with a $1
billion lawsuit against IBM. SCO's warning to Linux customers means the
company's case against IBM is likely to be a closely-watched test bed for
the company's ability to press its claims.

SCO's Chris Sontag, senior vice president and general manager of
SCOsource, an arm of the company recently formed to license Unix System
V libraries, has announced that the company has plenty of evidence that
the Linux kernel -- including the official version maintained by kernel.org
-- contains illegally copied SCO UnixWare code. He claimed that some of
the infringement pre-dates IBM's involvement with Linux, while other code
is the result of the alleged infringement that led SCO to launch its suit
against IBM.

To back up the company's claim, Sontag said SCO, within the next few
weeks, will invite an independent panel, under NDA, to inspect its Unix
source code and Linux source code side-by-side.

SCO issued a statement in response to Messman's letter Wednesday: "SCO
owns the contract rights to the Unix operating system. SCO has the
contractual right to prevent improper donations of Unix code, methods or
concepts into Linux by any Unix vendor.

"Copyrights and patents are protection against strangers. Contracts are
what you use against parties you have relationships with. From a legal
standpoint, contracts end up being far stronger than anything you could do
with copyrights.

"SCO's lawsuit against IBM does not involve patents or copyrights. SCO's
complaint specifically alleges breach of contract, and SCO intends to
protect and enforce all of the contracts that the company has with more
than 6,000 licensees.

"We formed SCOsource in January 2003 to enforce our Unix rights and we
intend to aggressively continue in this successful path of operation."

Meanwhile, open source guru Bruce Perens applauded Novell's decision to
enter the fracas. "Novell has answered the call of the open source
community," he said. "We admire what they are doing. Based on recent
announcements to support Linux with NetWare services and now this
revelation, Novell has just won the hearts and minds of developers and
corporations alike."

SCO Wednesday reported net income of $4.5 million, 33 cents per diluted
share, on revenue of $21.4 million in the second quarter of fiscal 2003. It
cited its SCOsource initiative, which has led the company into a high
profile lawsuit against IBM and conflict with the Linux community, as a
prime reason for that result.

"During the quarter ended April 30, 2003, the first two licensing
agreements related to our SCOsource initiative, our division for licensing
and protecting the company's Unix intellectual property, provided the
company with $8.8 million in cash and added $6.1 million to gross margin.
There are over 6,000 source code licensees of our Unix operating system,
and we believe the SCOsource initiative will continue to gain momentum
as we pursue enforcement of the company's intellectual property rights."

One of those two licensing agreements was unveiled last week, when SCO
announced that Microsoft had licensed its property to "ensure intellectual
property compliance across all Microsoft solutions."

McBride also projected Wednesday that the third quarter will see revenues
in the range of $19 million to $21 million. "These projections anticipate
revenue contributions of approximately two-thirds from our operating
system platforms and one-third from our SCOsource initiative," he said.

That revenue may prove essential if SCO elects, as it has hinted, to pursue
a copyright infringement case against IBM, or others in the Linux
community, as opposed to just the misappropriation of trade secrets case
it has currently filed against IBM.

"A misappropriation case is not particularly expensive," John Ferrell,
founding partner and chairman of the intellectual property practice at
Palo Alto-based law firm Carr & Ferrell LLP, told internetnews.com. "To
the extent that they begin to raise copyright infringement issues and
patents are ultimately brought in -- which they could well be -- this
could be an incredibly difficult litigation for SCO."

He noted that Lotus fought Borland for the better part of a decade over
copyright infringement and patents. "Both suffered badly by the time it
finished in the Supreme Court," he said.